>>Why Deck ?<<
At current prices it's a huge bargain, if the management is not lying -- forward P/E in the single digits, PEG less than .5, no debt, healthy free cash flow. I bought May calls for the dead cat bounce, which i already sold, and stock, which I am keeping for the longer term, because I don't think DECK is a dead cat.
DECK basically owns the Teva and UGG luxury footwear brands. UGG has been very hot lately. Most of its sales are in CA and they just started expanding in the rest of the country.
Their earnings growth in the last few years has been great and there are indications it will continue to be so in the next few, barring severe recession. And while I expect severe recession, I don't expect it in the next few months and I rarely hold an individual stock for more than a year.
The stock is a medium cap with 8 million shares float and management (basically, the founder and chairman) owns 25% of it. They have less than 200 employees. They just hired an outside professional CEO to guide them through the growth pain of turning from a quarter billion company to a billion one. It's a tricky transition for any company.
The stock tanked after earnings, 10 days ago, presumably because institutions, which owned 95% of the float, abandoned it in droves. Half of the float was also shorted, so I am guessing a lot of the institutional sales went to cover a lot of the shorts. DECK is one of those luxury consumer stocks that are hated by the bears, who expect the consumer to collapse any day now.
The reason for the tank:
Slightly lower 2nd Q earnings, and a huge PERCENTAGE increase in UGG inventories.
However:
Management explicitly reaffirmed full year earnings expectations, and gave a good explanation, IMO, for the increased inventories. Their story is that they have preliminary orders to fully justify their inventory gamble -- they are, of course, protected by safe harbor rules. Last year they had to scramble and actually airfreight UGGs from the factories to the retailers at huge expense because of inadequate inventories. They did not want to repeat the experience this year, they say. Listen to their earnings conference call for more color.
My observations:
UGG is a luxury brand. It sells for much more than it costs to make -- so the inventory cost is not a big issue. Australian and NZ UGG factories are maxed out and Chinese factories are just ramping. In order to get enough product for the key fall and winter seasons, you need to accumulate product NOW.
Interesting titbit:
The new CEO (three weeks on the job) was given a 50K share sign on bonus, but the last couple of days bought shares twice in the open market.
By the way, since earnings, DECK float has turned over more than twice, so at this point it's mostly at the mercy of day traders. |
